MILLIONS of savers have money in deposit accounts that pay derisory rates of interest. The typical rate on a balance of £1,000 is 2.96%, according to Chase de Vere, an adviser. You can earn more than 5.25% if you pick the right deal.

However, you need to look at more than just the headline rate of interest. We puncture some of the savings myths and show you how to identify the best account.

You can’t lose money in a deposit account

Most people assume their cash is safe in a deposit account. But you can lose money after tax and inflation. Nearly half of all savings accounts fail to offer higher-rate taxpayers a real rate of return, according to Bates Investment Services, an adviser. And 22% of savings accounts do not pay a positive return after basic-rate tax and inflation.

Higher-rate taxpayers need an account that pays at least 3.67% to earn a real rate of return. Basic-rate payers need to earn at least 2.75%.

The highest gross rate will always give the best return

The amount of interest you earn over a year will vary depending on whether it is calculated monthly or annually. You therefore need to be careful when comparing gross rates.

Paul Ilott at Bates said: “If interest is calculated monthly, you might get a bigger return over a year, even if the rate is slightly lower.You need to look at the annual equivalent rate (AER) because this will take the compounding into account.”

For example, Yorkshire building society’s E-saver account pays a gross rate of 5.2% and interest is calculated annually. The AER is therefore also 5.2%. Northern Rock’s Silver savings account, available to the over-50s, pays a gross rate of 5.1%, but the interest is compounded monthly and the AER is actually 5.22%.

If you invested £10,000 in the Yorkshire account, you would earn £520 interest over a year. However, you would earn £522 if you invested the same amount in the Northern Rock account.

If you kept your money invested for five years, your £10,000 would have grown to £12,884.83 with Yorkshire or £12,897.65 with Northern Rock.

The best deals pay introductory bonuses

Several banks and building societies pay a high introductory rate on some of their savings deals. The bonus rate propels the account into the best-buy tables, but it lasts for only six or 12 months. If you are not prepared to switch regularly, you should look at the AER to find out if you would be better off over the longer term opting for a lower rate with no bonus.

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